Is PetSmart an Option Trader’s Best Friend?

Specialty retailer a good candidate for long calls

If you have a pet, you know how tight the bond can be between owners and their domesticated furry (or feathered, or finned) friends. The same can be true of traders and their trading plans. The closer a trader embraces and adheres to his or her successful trading plan, the more the bond grows between them.

Here is one trade idea that embraces both the love of pets and the love of a potential profitable set-up that could align with your trading plan.

The Trade Idea: Long Call

The trade: Buy the PetSmart Inc. (NASDAQ:PETM) April 55-strike calls for $2.75 or less ($275 per contract). PETM is currently trading at $57.01.

The strategy: Buying a long call is probably the most basic of all option strategies and profits as the stock advances. Maximum profit is theoretically unlimited because PETM can continue to rise. The maximum loss, on the other hand, is just the premium of $2.75 if PETM finishes below $55 at April expiration.

Breakeven is at $57.75 at expiration (the strike price plus the premium paid). If PETM is trading above this level when the options expire, the call will be profitable. This is a move of roughly 1.2% from current levels.

The rationale: PETM is the largest specialty pet retailer and plans on expanding even more in the future. The company recently announced earnings and its profit has grown by double digits for the last eight quarters. PETM officials forecasted a current-year profit of $3.02 to $3.16 a share and 70 cents to 74 cents in the first quarter. This outlook was more than most analysts’ forecasts. Last Thursday, PETM announced plans to pay a 14-cent dividend per share to shareholders of record at the close of business on April 27, 2012.

Technically, the stock has been in a solid uptrend since October of 2011. This past week the stock pulled back from its all-time high and looks like it is setting up a picturesque buy scenario on a bull-market pullback.

Trade Management

If the stock can climb through Friday’s high — which was $57.59 — it might take flight like a bird in one of its stores. If the stock drops below a support level of $56.50, this trade idea has probably gone to the dogs!

As of this writing, John Kmiecik does not own any shares mentioned here.